LONDON (Reuters) - The global banking system has more cash now than at any time since the 2008 crisis but the failure of banks outside the United States to lend that money out is fast becoming the biggest barrier to economic growth.
This is potentially dangerous for the world economy because after nearly a decade of unprecedented stimulus to revive the global economy and financial system, the effectiveness of central banks’ policy measures is fading.
The slowdown in the velocity of money is being blamed on a range of factors including the large amount of debt still in the system, banks sinking into a liquidity trap and the unwillingness of households, businesses and banks themselves to take risks.
Rectifying this will require a mix of growth-friendly measures in fiscal policy, regulation, and structural reforms, analysts say. It won’t be a quick or easy fix.
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Analysis from Morgan Stanley shows that the amount of cash in the G4 economies of the United States, the euro zone, Japan and Britain has expanded up to five-fold since 2008 thanks to unprecedented stimulus from these central banks.
The money base includes currency in circulation, commercial bank deposits at the central banks and central bank liabilities, Morgan Stanley said.
Yet only U.S. bank lending is higher now than it was then. Lending is barely higher in Japan, steady in the euro zone and notably lower in Britain.
Mohamed El-Erian, chief economic adviser at Allianz, and former CEO and co-CIO at bond fund Pimco, reckons central banks’ firepower is almost exhausted, and the responsibility for securing a stable and thriving economy must be shared broadly.
“Central banks have not run out of instruments, they’re running out of effective instruments. But it’s going to take a shift in the economic paradigm, and that’s not going to happen on its own,” he said.
Reporting by Jamie McGeever; Graphic by Vincent Flasseur; Editing by Catherine Evans